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What Are the Different Methods of Financing Economic Development?

Government agencies, non-profit organizations, and private corporations all play a role in financial economic development. Extending financing either through grants or loans benefits the financier because in the process, a region or community strengthens its economic position and potential for growth. Subsequently, a greater number of residents may find employment and business activity is likely to increase. Financiers could become active in financing economic development in places where faltering business or employment conditions exist.

Certain programs promote the expansion of economic activity specifically in rural areas. To qualify for financing, business owners may need to demonstrate the potential to employ individuals who are designated as low-income residents. Financing economic development in rural areas can increase commerce, employ a greater number of people, and potentially reduce crime as greater opportunities arise for a better standard of living.

Loans that are intended to spur economic development might have more attractive terms in comparison to more traditional forms of financing. This is because economic development programs are designed by organizations that have an interest in the creation of business activity in a region. Although loans extended for financing economic development may still need to be repaid, the interest rates that are charged are often lower than what is available through other financial institutions. The length of time over which the loan may be repaid is also likely to favor the borrower.

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Local government agencies could receive grants for financing economic development. The nature of a grant is such that the local body does not typically need to repay the funds. Criteria to obtain a grant may be highly specific and recipients may need to direct funds towards a certain type of activity, such as infrastructure development. Certain government grants are meant to supplement other types of financing and may not be enough alone to complete some construction project. The criteria that grant recipients must meet varies based on the financier but might include verifying that a percentage of the funds will be used to create new employment opportunities.

Towns and municipalities may be permitted to issue bonds, which are a form of debt, for financing economic development. Government agencies have historically created programs that provide some tax incentive for local areas to sell bonds to investors to raise money for projects. Municipal bond issuance is not uncommon, but to qualify for a specific government program that provides incentives issuers may need to agree to use the financing towards improving business conditions in poverty-stricken areas or in places where unemployment has been a significant problem.

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